Russia & OPEC

“August 1986, a stake was driven silently through the heart of the Soviet economy. Although the effects would not be felt immediately, the Saudis opened the spigot and flooded the world market with oil.” This quote is from Peter Schweizers book “Victory ­– the Reagan Administration’s Secret Strategy that hastened the Collapse of the Soviet Union” that came out three years after the Soviet Empire had collapsed. Thomas Friedman, one of the leading columnists of the New York Times, who has made Americas Addiction to Oil his own personal crusade wrote in a column in December 2004, “When did the Soviet Union collapse? When did reform take off in Iran? When did the Oslo peace process begin? When did economic reform become a hot topic in the Arab world? In the late 1980's and early 1990's. And what was also happening then? Oil prices were collapsing.”

The drop in oil prices from 30 Dollars in November 1985 to 10 Dollar in July 1986 basically flushed everyone out of the market, and the Soviet Union was hit hard. The Saudi daily production had jumped from less than 2 million barrels to almost 6 million barrels, by the late fall of 1985 crude production would climb to 9 million barrels a day.

The problem for the Kremlin was, that the drop in oil prices was strapping the USSR of much-needed foreign currency, the Soviet trade-balance moved from 700 Million Dollars surplus in the first quarter of 1984 to a 1.4 billion deficit in the first quarter of 1985.

“The drop in oil prices was devastating, just devastating”, Yevgenny Novikov, Senior Staff Member of the Soviet Communist Party Central Committee told Schweizer for his book.

So one could say that the fates of Saudi Arabia and what is now the Russian Federation and former Soviet Republics are intertwined: The oil market, like other markets, is like a cake. If the other takes a big slice of market share, then you’re left with crumbs. At least, that’s what happens in a sellers market.

Enter the rise of China and India and the US falling in love with gas-guzzling SUV’s: We’re in a buyers market now. The world can’t just get enough of hydrocarbons. What’s on the table now is – like in the example before – a cake, this time the demand-cake and not the market-share-cake: This cake is big. 80 Million barrels of oil per day. The US cuts out the biggest slice – around 20 million barrels a day, the EU 14.6, Japan, Korea, Australia and New Zealand 8.6 and China more than 7 Million barrels per day. India with it’s population of more than a billion is still doing fine with 2.6 million barrels a day, but it’s catching up. The question everyone sitting around the table is asking is: “Hey is there enough for everyone?”

Good question. Geologists, especially in Europe, started a debate on Peak Oil, with some experts predicting the peaking of world oil resources sometime between pretty much now, while you are reading this magazine and 2015, maybe 2020. That doesn’t mean, that all oil wells will fall dry, but what it means is, that it will get more and more costly to extract, what’s still there. First the western oil companies ridiculed them, today Chevron has set up a website (www.willyoujoinus.com) that disseminates the views of the peak-oilists.

Europeans and Japanese are investing in fuel efficiency and alternative energy resources, and even the head of the Oil & Gas-Administration, President George W. Bush is now talking about getting rid of “America’s addiction to oil”. The Saudis seem to take this seriously, judging from the nervous remarks of oil minister Ali I. Al-Naimi and the Saudi Ambassador in Washington, D.C. Price Turki al Faisal.

Prince Turki said in a speech in the heart of the US oil industry, Dallas, Texas: “Oil is our bread and butter, at least for the time being, and so any decisions by such an important partner as the United States affects us and makes us concerned about where we are going.” The question is though, whether one should take Bush’s State-of-the-Union-blah-blah seriously. I wouldn’t – as long as he doesn’t fire former Halliburton CEO Vice President Dick Cheney to show, that he’s serious.

But back to the cake. The oil-cake is in high demand, everyone wants a slice. So there is no trouble between the two biggest cake-bakeries, there is enough consumers, who are willing to come back for more. That means that all is well between Saudi Arabia and Russia. The new motto: Cooperation instead of competition.

The two countries share a troubled past: Saudi Arabia was a staunch ally of the USA since American geologists found oil in the Saudi desert in 1938 and Franklin D. Roosevelt met with King Ibn Saud on board of the USS Quincy in the Suez-Canal in 1945. When the USSR invaded Afghanistan, Saudi organisations were one of the most important backers of the Mujahedin and in the 1990ies Saudi “charities” supplied Chechen Rebels.
Then Crown Price Abdullahs visit to Moscow in 2003 (the first since the opening of diplomatic relations between both countries) opened a new chapter in Russia-Saudi-relations. From then on both countries put their common interests before competition and signed a number of bilateral agreements, the most important of which is an agreement on cooperation in the field of oil and gas. Will the country that helped bring down the USSR with low oil prices now support the restoration of the Russian Empire while supporting high oil prices? This new OPEC-Russia-Axis is something to watch out for.